Saturday, September 5, 1998
The will of Princess Bernice Pauahi Bishop does not instruct the trustees to create a financial empire. Instead, it orders them to spend all trust income on charitable purposes, primarily the education of Hawaii's children.
Trustees arent running
That doesn't mean investments must be made with a sole goal of generating income as opposed to building up the size of the estate, or that every penny of income must be spent before midnight on the last day of the year in which it was earned.
Trust law allows the trustees to invest partly for growth, to avoid erosion due to inflation. The probate court has said that Bishop Estate trustees may accumulate income temporarily, when it doesn't make sense to spend it right away.
But trust law and probate court orders require that all of this be done in accordance with a comprehensive, up-to-date plan.
Perhaps the most damning revelation in the recent master's report is that the trustees have, for many years, ignored not just trust law and specific court orders, but the will itself.
Basically, they've been focusing far more on building up their financial empire than on educating children. They've done this through inappropriate investments and by secretly diverting hundreds of millions of dollars -- five times the annual operating budget of Kamehameha Schools -- away from its intended use.
Let's say your favorite aunt died and left her entire estate in trust, primarily for your benefit. All income is supposed to go to you for as long as you live. But your distant cousin, Jack, has somehow has managed to get the judge to name him as trustee, despite not having any relevant experience.
How would you react if Jack told you that he plans to invest trust funds with a primary goal of enlarging the estate rather than producing income? Remember, you only get income.
Why would Jack take this approach? Perhaps it's because a bigger estate will justify bigger trustee fees and expand Jack's personal opportunities.
It gets worse. After years of paltry distributions, you find out that Jack has not been distributing all the income. Instead, he secretly used your income to build up "his" estate.
Besides being outraged at Jack, you would probably wonder why your lawyer and the trust's independent CPA didn't point this out to you. You also might wonder why the probate court approved Jack's accounting, year after year.
Perhaps now you can appreciate why the Bishop Estate trustees' self-serving choice of investments and unauthorized diversion of trust income were egregious breaches of trust.
And what do the trustees have to say about this? So far, the sole attempt to explain it has come from Bill McCorriston, a lawyer who in theory is watching out for the best interests of the beneficiaries rather than those of the trustees.
He's said this all boils down to a difference of opinion between accounting firms as to how to best report gains from land sales.
But no one has ever suggested that gain from involuntary land sales should be treated as income and spent.
That's why McCorriston's explanation makes absolutely no sense. He either doesn't understand basic trust accounting rules, or he's dissembling.
Bishop Estate Archive
Editor's note: The co-writers of this letter are the authors of
"Broken Trust," the Aug. 9, 1997, essay printed in the Star-Bulletin that
helped launch the state investigation into the management
of the Bishop Estate.